This piece captures an important puzzle: China’s protracted cycle of credit and growth isn’t just an anomaly — it reflects distinct institutional incentives embedded in the Party-state’s financial, regulatory, and political architecture.
What’s often missed in narratives about “15 years of abnormal credit expansion” is that Chinese policy isn’t responding to a single business cycle — it’s managing the inherent tension between growth legitimization, local government revenue models, and an underdeveloped private credit system. Unlike Western market-driven cycles where capital allocation emerges through dispersed risk pricing, China’s system channels investment through state-dominated intermediaries with mandates that explicitly prioritize output and employment stability over traditional credit discipline. That institutional design makes prolonged expansion almost systemic rather than anomalous. (bloomberg.com)
The long horizon here isn’t reflexive or ad hoc — it’s a policy equilibrium that minimizes cyclical contraction at the expense of rising leverage and asset distortion. Local governments, dependent on land sales and off-budget financing vehicles, face incentive asymmetries that make deleveraging politically and administratively costly. Similarly, state banks operate under mandates that blur commercial judgment with development goals, producing credit flows that perpetuate systemic exposure rather than correct it.
What’s missing in most treatments — including this excellent overview — is the recognition that this is not a distortion to be “fixed,” but the operational center of gravity of Chinese economic policy. Understanding that shifts the debate: it is not just about how long this cycle goes on, but how entrenched incentives within the Chinese model sustain it, and what that means for external creditors, global capital allocation, and geopolitical economic risk.
The reason isn’t complex; Friedman’s theory is flawed. What’s been central to the Chinese experience has been production and productivity underpinned by progressive upward shifts in Energy Return On Energy Invested (EROEI). Asset price bubbles have been the clear result of a rapidly accelerating gap between the expansion of targeted system liquidity (namely into real estate 2015-2020 or so) and the tempo of material realisation. Deleveraging has brought that back under control. Coupled with EROEI efficiency intensely competitive markets distribute the benefits of abundance by way of plentiful goods at low and flat prices. All of this took place as money supply increased, incidentally.
This piece captures an important puzzle: China’s protracted cycle of credit and growth isn’t just an anomaly — it reflects distinct institutional incentives embedded in the Party-state’s financial, regulatory, and political architecture.
What’s often missed in narratives about “15 years of abnormal credit expansion” is that Chinese policy isn’t responding to a single business cycle — it’s managing the inherent tension between growth legitimization, local government revenue models, and an underdeveloped private credit system. Unlike Western market-driven cycles where capital allocation emerges through dispersed risk pricing, China’s system channels investment through state-dominated intermediaries with mandates that explicitly prioritize output and employment stability over traditional credit discipline. That institutional design makes prolonged expansion almost systemic rather than anomalous. (bloomberg.com)
The long horizon here isn’t reflexive or ad hoc — it’s a policy equilibrium that minimizes cyclical contraction at the expense of rising leverage and asset distortion. Local governments, dependent on land sales and off-budget financing vehicles, face incentive asymmetries that make deleveraging politically and administratively costly. Similarly, state banks operate under mandates that blur commercial judgment with development goals, producing credit flows that perpetuate systemic exposure rather than correct it.
What’s missing in most treatments — including this excellent overview — is the recognition that this is not a distortion to be “fixed,” but the operational center of gravity of Chinese economic policy. Understanding that shifts the debate: it is not just about how long this cycle goes on, but how entrenched incentives within the Chinese model sustain it, and what that means for external creditors, global capital allocation, and geopolitical economic risk.
The reason isn’t complex; Friedman’s theory is flawed. What’s been central to the Chinese experience has been production and productivity underpinned by progressive upward shifts in Energy Return On Energy Invested (EROEI). Asset price bubbles have been the clear result of a rapidly accelerating gap between the expansion of targeted system liquidity (namely into real estate 2015-2020 or so) and the tempo of material realisation. Deleveraging has brought that back under control. Coupled with EROEI efficiency intensely competitive markets distribute the benefits of abundance by way of plentiful goods at low and flat prices. All of this took place as money supply increased, incidentally.
It seems a deflationary world is more productive in some ways than a rent seeker economy. But it is prone to strategic errors left uncorrected.